1. Chapter Copyright© 2007 Thomson Learning All rights reserved 3 The Institutional Context of Multinational Management

2. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Understand the national context and how it affects the business environment Understand the influence of the institutional context of countries Define social institutions and understand the basic forms of social institutions Understand how social institutions influence both people and organization Understand the national context and how it affects the business environment Understand the influence of the institutional context of countries Define social institutions and understand the basic forms of social institutions Understand how social institutions influence both people and organization

3. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Understand the basic economic systems and influence on multinational operations Understand industrialization and implications for multinationals Understand the world’s basic religions Develop an understanding of education Understand the basic economic systems and influence on multinational operations Understand industrialization and implications for multinationals Understand the world’s basic religions Develop an understanding of education

4. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Understand social inequality and its implications for multinationals Understand the importance of the national context and its connection with other international management areas Understand social inequality and its implications for multinationals Understand the importance of the national context and its connection with other international management areas

5. Copyright© 2007 South-Western/Thomson Learning All rights reserved Institutional Context Includes other elements besides national culture that can produce important differences Understanding the institutional context is therefore extremely important for better multinational management Includes other elements besides national culture that can produce important differences Understanding the institutional context is therefore extremely important for better multinational management

6. Copyright© 2007 South-Western/Thomson Learning All rights reserved National Context Made up of the respective national cultures and social institutions of any society National cultures of any society shape the important norms, values, and beliefs in any society Made up of the respective national cultures and social institutions of any society National cultures of any society shape the important norms, values, and beliefs in any society

7. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.1: A Model the National Context

8. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Institutions Complex of positions, roles, norms, and values organizing stable patterns of human resources to sustain important societal structures Three key social institutions The economic systems The level of industrialization The religions Complex of positions, roles, norms, and values organizing stable patterns of human resources to sustain important societal structures Three key social institutions The economic systems The level of industrialization The religions

9. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Institutions and Influence on Society Regulative social institution: constrains behaviors through rules Cognitive dimension: widely shared knowledge regarding how things are done Normative dimension: values and norms promulgated by the social institution Regulative social institution: constrains behaviors through rules Cognitive dimension: widely shared knowledge regarding how things are done Normative dimension: values and norms promulgated by the social institution

10. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Institutions and Influence on Organizations Social institutions affect organizations as well as individuals Help define what are legitimate and correct management practices in a society Organizations are pressured to follow similar paths Organizational isomorphism: pressure to follow similar paths in management practices Social institutions affect organizations as well as individuals Help define what are legitimate and correct management practices in a society Organizations are pressured to follow similar paths Organizational isomorphism: pressure to follow similar paths in management practices

11. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizational Isomorphism Coercive isomorphism: forces that coerce organizations to adopt certain practices Mimetic isomorphism: organizations purposefully copy the strategies of the most successful organizations Normative isomorphism: conformance to professional and technical norms Coercive isomorphism: forces that coerce organizations to adopt certain practices Mimetic isomorphism: organizations purposefully copy the strategies of the most successful organizations Normative isomorphism: conformance to professional and technical norms

12. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic Systems Economic systems: system of beliefs, activities, organizations and relationships that provide the goods and services of a society Important implications based on Type of economic systems Market transitions Privatization Economic systems: system of beliefs, activities, organizations and relationships that provide the goods and services of a society Important implications based on Type of economic systems Market transitions Privatization

13. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic Systems Capitalist/market economy: production is decentralized to private owners Owners perform these activities to make profits Socialist/command economy: production resources are owned by the state Production decisions are centrally coordinated Mixed economy: combines aspects of capitalist and socialist economies E.g., Sweden, France, Denmark, Italy and India Capitalist/market economy: production is decentralized to private owners Owners perform these activities to make profits Socialist/command economy: production resources are owned by the state Production decisions are centrally coordinated Mixed economy: combines aspects of capitalist and socialist economies E.g., Sweden, France, Denmark, Italy and India

14. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic Systems: Index of Economy Freedom The absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself The index includes 10 indicators ranging from trade policy, taxation policies, and the level of governmental intervention in the economy to property rights and regulation The absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself The index includes 10 indicators ranging from trade policy, taxation policies, and the level of governmental intervention in the economy to property rights and regulation

15. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.2: Selected Top and Bottom 10 Countries on Index of Economic Freedom

16. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic Systems: Implications Decisions to operate in a country can be made based on the dominant economic type In mixed economies, multinationals should expect to subordinate its economic goals and respect social objectives Multinationals should also expect to develop more formal relations with the government in mixed economies Index of economic freedom can be used to determine the extent of governmental intervention Decisions to operate in a country can be made based on the dominant economic type In mixed economies, multinationals should expect to subordinate its economic goals and respect social objectives Multinationals should also expect to develop more formal relations with the government in mixed economies Index of economic freedom can be used to determine the extent of governmental intervention

17. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic System: Market Transitions Changes societies experience as they move from socialism to a market based economy Multinational implications Need to turn around inefficient formerly state-owned companies to perform business functions Motivational issues with workers Changes societies experience as they move from socialism to a market based economy Multinational implications Need to turn around inefficient formerly state-owned companies to perform business functions Motivational issues with workers

18. Copyright© 2007 South-Western/Thomson Learning All rights reserved Economic System: Privatization Privatization: transfer of state ownership to private individuals Implications Significant opportunities to invest in companies Opportunities to access new markets and cheap labor Privatization: transfer of state ownership to private individuals Implications Significant opportunities to invest in companies Opportunities to access new markets and cheap labor

19. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.3: Selected countries and the amount of money raised by privatization

20. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industrialization How production is organized and distributed in society Types Pre-industrial Industrial Postindustrial How production is organized and distributed in society Types Pre-industrial Industrial Postindustrial

21. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industrialization Pre-industrial society: agriculture dominates the economic environment Industrial society: dominance of the secondary or manufacturing sectors Postindustrial society: emphasis on the service sectors Pre-industrial society: agriculture dominates the economic environment Industrial society: dominance of the secondary or manufacturing sectors Postindustrial society: emphasis on the service sectors

22. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.4: Selected countries and the distribution of employment by primary, secondary and tertiary sectors

23. Copyright© 2007 South-Western/Thomson Learning All rights reserved Implications of industrialization Direct correspondence between industrialization and economic development Industrial societies favor growth and innovation Favorable environment for business Industrial societies present significant market size and growth Direct correspondence between industrialization and economic development Industrial societies favor growth and innovation Favorable environment for business Industrial societies present significant market size and growth

24. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industrialization Pre-industrial countries provide cheap labor and untapped markets Postindustrial societies Emphasis on quality-of-life as opposed to economic achievement People more likely to espouse individual expression values and movement toward more humane societies Post-materialist values Pre-industrial countries provide cheap labor and untapped markets Postindustrial societies Emphasis on quality-of-life as opposed to economic achievement People more likely to espouse individual expression values and movement toward more humane societies Post-materialist values

25. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.6: Post-Materialist scores of selected countries

26. Copyright© 2007 South-Western/Thomson Learning All rights reserved Religion Shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces Forms the very foundation of human society Provides individuals with guidelines to deal with issues Christianity, Islam, Hinduism and Buddhism are followed by almost 71% of the world’s population Shared set of beliefs, activities, and institutions that have basis upon faith in supernatural forces Forms the very foundation of human society Provides individuals with guidelines to deal with issues Christianity, Islam, Hinduism and Buddhism are followed by almost 71% of the world’s population

27. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.7: Distribution of Religions Around the World

28. Copyright© 2007 South-Western/Thomson Learning All rights reserved Christianity Religion based on the life and teachings of Jesus The most practiced religion around the world Protestantism emphasizes wealth and hard work Ten commandments – provides the basis for ethical behaviors Religion based on the life and teachings of Jesus The most practiced religion around the world Protestantism emphasizes wealth and hard work Ten commandments – provides the basis for ethical behaviors

29. Copyright© 2007 South-Western/Thomson Learning All rights reserved Islam Religion based on the submission to the will of Allah (God) The second largest of the world’s religion Muslims live according to Islamic laws or Shari’ah Based on five pillars Religion based on the submission to the will of Allah (God) The second largest of the world’s religion Muslims live according to Islamic laws or Shari’ah Based on five pillars

30. Copyright© 2007 South-Western/Thomson Learning All rights reserved Islam Implications for multinationals Accommodate praying five times a day The Ramadan: a month of fasting Natural concern with social justice Prohibits the payment or receipt of interest Gender roles Implications for multinationals Accommodate praying five times a day The Ramadan: a month of fasting Natural concern with social justice Prohibits the payment or receipt of interest Gender roles

31. Copyright© 2007 South-Western/Thomson Learning All rights reserved Hinduism Acceptance of the ancient traditions of India that are based on the Vedic scriptures Currently 760 million Hindus living around the world Belief in reincarnation The caste system Ethical behaviors; respect for parents Acceptance of the ancient traditions of India that are based on the Vedic scriptures Currently 760 million Hindus living around the world Belief in reincarnation The caste system Ethical behaviors; respect for parents

32. Copyright© 2007 South-Western/Thomson Learning All rights reserved Hinduism Implications for multinationals Spiritual achievement is an important value for most Hindus Caste system is also very pervasive Need to be aware of caste system Ex: Lower caste supervising higher caste can be a problem Implications for multinationals Spiritual achievement is an important value for most Hindus Caste system is also very pervasive Need to be aware of caste system Ex: Lower caste supervising higher caste can be a problem

33. Copyright© 2007 South-Western/Thomson Learning All rights reserved Buddhism Religious tradition that focuses on the reality of world suffering and the ways one can be freed from suffering Craving and desires produce suffering Dominant religion in Asia Religious tradition that focuses on the reality of world suffering and the ways one can be freed from suffering Craving and desires produce suffering Dominant religion in Asia

34. Copyright© 2007 South-Western/Thomson Learning All rights reserved Buddhism Implications for multinationals Encourage hard working – laziness is seen as negative Emphasizes teamwork – all beings are interconnected Emphasis on compassion and love Implications for multinationals Encourage hard working – laziness is seen as negative Emphasizes teamwork – all beings are interconnected Emphasis on compassion and love

35. Copyright© 2007 South-Western/Thomson Learning All rights reserved Religiosity Indication of the importance of acceptance of the core philosophies of religion in one’s life Gives an idea of the degree of responsiveness to needed to accommodate religion Indication of the importance of acceptance of the core philosophies of religion in one’s life Gives an idea of the degree of responsiveness to needed to accommodate religion

36. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.8: Religiosity of Selected Countries from the World Values Survey

37. Copyright© 2007 South-Western/Thomson Learning All rights reserved Education Education: organized networks of socialization experiences which prepare individuals to act in society Central element in organization of society Helps construct competencies, professions and professionals Education: organized networks of socialization experiences which prepare individuals to act in society Central element in organization of society Helps construct competencies, professions and professionals

38. Copyright© 2007 South-Western/Thomson Learning All rights reserved Education: Implications Gives an idea of the skills level of workers in any society The more educated, the more skills workers have Multinationals can look at educational attainment scores to determine the nature of the workforce Also look at other scores Gives an idea of the skills level of workers in any society The more educated, the more skills workers have Multinationals can look at educational attainment scores to determine the nature of the workforce Also look at other scores

39. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.9: Educational Attainment Scores for Selected Countries

40. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.10: Mathematics Scores for top 10 countries

41. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.10: Science Scores for the Top 10 countries

42. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Inequality Refers to the degree to which people have privileged access to resources and positions within societies In societies that have high social inequality, a few individuals have the ability to control and use important resources as sources of control Refers to the degree to which people have privileged access to resources and positions within societies In societies that have high social inequality, a few individuals have the ability to control and use important resources as sources of control

43. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Inequality: Implications Multinational companies are facing significant criticisms for their operations in countries with high social inequalities Many multinational companies are realizing that it is sometimes in their interest to be more socially responsible to mitigate social inequalities Many multinational companies now actively avoid countries with high inequalities to prevent potential negative publicity Multinational companies are facing significant criticisms for their operations in countries with high social inequalities Many multinational companies are realizing that it is sometimes in their interest to be more socially responsible to mitigate social inequalities Many multinational companies now actively avoid countries with high inequalities to prevent potential negative publicity

44. Copyright© 2007 South-Western/Thomson Learning All rights reserved Social Inequality: Implications Multinational companies can consider the GINI index as an indicator of the degree of social inequality

45. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 3.12: The GINI Index for Selected Countries

46. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and International Management Social institutions are key aspects of understanding the business environment in any country Social institutions shape norms, values, and beliefs that determine acceptable and unacceptable business practices Social institutions are key aspects of understanding the business environment in any country Social institutions shape norms, values, and beliefs that determine acceptable and unacceptable business practices

47. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and International Management: Conclusion The national context Has significant influence on a company’s strategy Determines the comparative advantage of nations, which ultimately determines which strategies multinational companies choose The national context Has significant influence on a company’s strategy Determines the comparative advantage of nations, which ultimately determines which strategies multinational companies choose

48. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and International Management: Conclusion The national context Also determines the global platform, namely the areas of business that can be performed the best in a country Plays an important role in the human aspect of international management Is a determinant of the nature of the relationship between workers and their superiors The national context Also determines the global platform, namely the areas of business that can be performed the best in a country Plays an important role in the human aspect of international management Is a determinant of the nature of the relationship between workers and their superiors

49. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and International Management: Conclusion The national context Determines how people view work and sets the state for motivation in an international context Influences how multinational companies approach human resource management policies An important influence on how organizations are designed The national context Determines how people view work and sets the state for motivation in an international context Influences how multinational companies approach human resource management policies An important influence on how organizations are designed